Start date:
End date:
Location: London
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The IASB and the FASB met in London with some staff members joining the meeting via video link. Prior to the joint meeting, the IASB met separately to discuss leases and liabilities. |
Tuesday 15 June 2010IASB meeting (11:35-13:10)
IASB-FASB joint meeting (14:45-18:30)
Wednesday 16 June 2010IASB-FASB joint meeting (08:30-17:45)
Thursday 17 June 2010IASB-FASB joint meeting (08:30-15:15)
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The Boards have discussed the application guidance proposed by the staff about what expected future cash flows should be included in the measurement of insurance contract.
The Boards have discussed the application guidance proposed by the staff about what expected future cash flows should be included in the measurement of insurance contract. The aim of the discussion was to seek feedback for staff to take away and update the drafting.
The proposed principle is to include future cash flows from the fulfilment of an insurance contract. The cash flows should reflect the insurer's estimate of its cost to fulfil, so except for market variables the inputs are entity specific, and the emphasis is on the cash flows of existing contracts rather than from potential new contracts. The guidance specifies that insurer should include among the costs necessary to fulfil the contract all of the costs directly associated with it (direct costs) and a systematic allocation of costs that relate to the contract or contract activities (indirect costs). An appendix to the guidance provides examples of direct and incremental costs that are to be included and those costs to be excluded as not relevant to the fulfilment of obligation notion.
The guidance discusses a replicating portfolio for all or part of the insurance liability cash flows. While not mandating a replicating portfolio method, the staff paper suggests if such portfolio exists to calibrate the estimates calculated by insurer using another method to it.
Further the guidance explains that in estimating cash flows at the reporting date the measure should be current reflecting the probabilities and expectations as at that date and should not use the benefit of hindsight, nor should it include possible cash flows under possible future contracts.
The staff later clarified that cash flows can be estimated at their nominal or real value (i.e. adjusted for future inflation) as long as the assumptions are used consistently.
Overall many members felt the guidance was drafted well, however, there were few comments and clarifications proposed. The focus of the comments from FASB members was that some of the proposed costs to be included in the cash flows did not tie in well with the fulfilment notion. For example, the costs of insurer in paying on-going commissions to intermediaries for policies remaining in force would not be a cost of fulfilling an obligation to a policyholder. Equally policy administration and maintenance costs proposed to be included are not costs of fulfilling an obligation. This discussion highlighted the difference in the way IASB and FASB viewed the fulfilment notion. The IASB approach was more focused on whether the costs were direct and incremental to the contract rather than on whether they were directly linked to meeting the obligation to a policyholder.
On the application of a replicating portfolio the Board members asked the staff to clarify whether it needs to be calculated in all cases to enable the calibration to it, even if a different method is used by insurer.
Further, the Board members suggested clarification of the guidance on the impact of future events on the estimates of cash flows, to make the distinction clearer between the types of future events that need to be considered because they impact cash flows of the existing contracts and those future events that need to be ignored because they do not impact existing contracts.
Finally, the staff were asked to tighten the wording of the overall principle to link it more closely to the more detailed guidance that follows it.
After a high level theoretical debate whether components of insurance liability meet the definition of a monetary item, the Boards have unanimously approved the staff proposal to treat insurance contracts in their entirety, including all the components, as monetary items. This would mean that insurance contracts with expected foreign currency cash flows would be subject to the foreign currency retranslation rules. The Boards further agreed with the staff that pre-claims liabilities of short-duration contracts measured an unearned premium approach would also be considered monetary items. This is because the unearned premium approach is viewed as a shortcut measurement method to the full building blocks looking at the underlying cash flows approach and therefore there should not be a difference in the foreign currency treatment. This would differ from the current treatment of such contracts. Currently they are viewed as prepayments of future services and therefore non-monetary.
The Boards held a long and ultimately inconclusive discussion on acquisition costs. In many insurance contracts, the commission is obtained from the premium, almost as a premium add-on. The question then becomes, if they're going to be recovered (for example, from a broker, in the event of a policy lapsing), why are such costs expensed; should they not be an asset? FASB members noted that there is no actual guarantee of recoverability (dependant on lapse), so the contingent right to recover costs does not meet the criteria of an asset, which is why the FASB wishes to expense all acquisition costs.
Some IASB members noted that there appeared to be a disconnect between the way acquisition costs were treated depending on whether they were received from policyholders via gross premiums and then paid to brokers, or whether the premium was paid net via the broker. These members argued that there was no inherent difference in the economics of the situation, only in the presentation, so there was no reason to treat them differently. The reason for different presentation arises largely from the broker not having an account with the insurer (hence an asset raised), where a policyholder would have an account (likely an investment policy of some sort, as this is primarily an issue in life insurance where acquisition costs are significant) where the payout would be reduced by some sort of lapse-penalty, hence a reduction in the underlying liability.
The boards discussed the possibility of expensing acquisition costs as incurred unless recoverable, possibly limited only to broker recoveries (as lapse-penalties are likely to be included within the contract cash flows, hence within the liability if it relates to a policyholder). This did not receive significant support, as Board members argued that there still isn't any contractual right to receive cash, so no asset (dependent on some future event - the lapse - so a contingent asset at best).
The next question related to whether (assuming recoverability), the acquisition costs should be recognised in profit or loss as an expense. If not, what was the appropriate accounting? The initial proposal that P&L treatment was not appropriate and that broker recoveries should be recognised as prepayments and insured recoveries included with the liability were not well received. Board members argued that this is just another way of deferring and amortising the expense - just like DAC - which the Boards had already agreed not to do.
The boards then argued that, as acquisition costs are defined as incremental, the insurer is effectively using revenue (through the release to P&L) to create an asset that will generate future revenue streams - which seems counterintuitive.
The boards then tried to work through an example, but there were disagreements about the parameters for the example. The Chairman decided to terminate today's discussion - to be continued Wednesday.
The Board explored a possible hybrid lessor accounting model in this educational session.
The IASB explored a possible hybrid lessor accounting model. No decisions were taken. These issues will be discussed at a joint session with the FASB later in the week. The FASB preliminarily decided to apply the performance obligation approach to all leases, with a possible exception for manufacturers' and dealers' leases.
The staff discussed disadvantages and criticisms of both major models (performance obligation model and partial derecognition model). The staff also presented a variety of approaches with different emphasis placed on those models.
Most of the Board members agreed to scope out short term leases (that is, leases with maximum possible lease term of 12 months) from the leases requirements that would be accounted for by a simplified accrual accounting.
A few Board members expressed support for the staff recommendation to use the partial derecognition approach for all leases except short-term leases and leases of investment property (that might be expanded to some additional leases of real estate). Those Board members agreed that this approach would be consistent with the approach for lessees and would avoid double counting of assets. On the other hand, some Board members disagreed as they believed that this model does not overcome their concerns over the partial derecognition model that were expressed at the May Joint Board meeting. Those Board members continued to express their concerns over the application of the partial derecognition model.
One Board member noted that the presentation of partial derecognition approach would be complex as net gain presentation or presentation of gross revenue and costs of sales would be driven by a business model.
Several other Board members expressed their preference to use the performance obligation approach for leases where the lessor's exposure to the risks associated with the underlying asset is significant. They believed that such approach was conceptually-based and did not need any further exceptions. On the other hand, several other Board members expressed their concerns over this approach as it might be prone to structuring and would draw the line that the leases project should have removed. One Board member questioned whether it would not be preferable to retain the current guidance in IAS 17 Leases.
In the subsequent debate the Board members tried to reconcile the two accounting models. One Board member summarised that there are three items that cause the two model to appear differently in the financial statements - the net presentation of fixed asset, performance obligation and lease receivable under the performance obligation model, non-accretion of interest on the residual asset under the derecognition approach and recognition of gain on lease recognition under the partial derecognition approach when the carrying amount of the underlying asset is less than its fair value.
The Board also discussed the difference between the residual value of an asset under IAS 16 Property, Plant and Equipment and the proposed treatment of the residual asset under the partial derecognition approach. The staff noted that the residual asset reflect the allocation of the initial fair value of the asset and is not re-measured.
The Board will discuss these issues at a joint session with the FASB later in the week.
The Board explored a possible hybrid lessor accounting model in this educational session.
The IASB explored a possible hybrid lessor accounting model. No decisions were taken. These issues will be discussed at a joint session with the FASB later in the week. The FASB preliminarily decided to apply the performance obligation approach to all leases, with a possible exception for manufacturers' and dealers' leases.
The staff discussed disadvantages and criticisms of both major models (performance obligation model and partial derecognition model). The staff also presented a variety of approaches with different emphasis placed on those models.
Most of the Board members agreed to scope out short term leases (that is, leases with maximum possible lease term of 12 months) from the leases requirements that would be accounted for by a simplified accrual accounting.
A few Board members expressed support for the staff recommendation to use the partial derecognition approach for all leases except short-term leases and leases of investment property (that might be expanded to some additional leases of real estate). Those Board members agreed that this approach would be consistent with the approach for lessees and would avoid double counting of assets. On the other hand, some Board members disagreed as they believed that this model does not overcome their concerns over the partial derecognition model that were expressed at the May Joint Board meeting. Those Board members continued to express their concerns over the application of the partial derecognition model.
One Board member noted that the presentation of partial derecognition approach would be complex as net gain presentation or presentation of gross revenue and costs of sales would be driven by a business model.
Several other Board members expressed their preference to use the performance obligation approach for leases where the lessor's exposure to the risks associated with the underlying asset is significant. They believed that such approach was conceptually-based and did not need any further exceptions. On the other hand, several other Board members expressed their concerns over this approach as it might be prone to structuring and would draw the line that the leases project should have removed. One Board member questioned whether it would not be preferable to retain the current guidance in IAS 17 Leases.
In the subsequent debate the Board members tried to reconcile the two accounting models. One Board member summarised that there are three items that cause the two model to appear differently in the financial statements - the net presentation of fixed asset, performance obligation and lease receivable under the performance obligation model, non-accretion of interest on the residual asset under the derecognition approach and recognition of gain on lease recognition under the partial derecognition approach when the carrying amount of the underlying asset is less than its fair value.
The Board also discussed the difference between the residual value of an asset under IAS 16 Property, Plant and Equipment and the proposed treatment of the residual asset under the partial derecognition approach. The staff noted that the residual asset reflect the allocation of the initial fair value of the asset and is not re-measured.
The Board will discuss these issues at a joint session with the FASB later in the week.
The staff provided the Board an update on the comment letters and outreach on the liabilities project. The staff noted that constituents expressed serious concerns over part of the proposed measurement guidance - in particular measuring the obligations fulfilled by undertaking a service by estimating the amount that the entity would rationally pay a contractor at the future date to undertake the service on its behalf. That proposal gained no support among constituents. Most constituents also expressed concerns over application of risk adjustment to IAS 37-type of liabilities.
The staff also noted that many constituents commented on the other aspects of the proposed Liabilities IFRS, especially with regards to the probability threshold for recognition of liabilities and use of expected values in estimating liabilities. Some constituents suggested that a convergence project should be undertaken with the FASB to align the IFRSs and US GAAP. The staff plans to provide the Board with a full comment letter analysis at the September meeting. At that meeting the staff would ask the Board to provide further guidance on the project.
The Board held an initial discussion of balance sheet offsetting.
The staff reminded the Boards that they had invited representatives from banks, industry groups (International Swaps and Derivatives Association) and legal experts (in international financial law) to participate in an education session at the joint board in February 2010. A project on balance sheet offsetting was added to the FASB's agenda in February 2010 when it considered that it would be more appropriate to review broadly the general principles/criteria in current US GAAP that permit offsetting in the balance sheet. This session was intended to help the IASB and FASB staff to plan the project, should the IASB add it to its Agenda.
Much of the discussion focused on Master Netting Arrangements and similar offsetting arrangements. In an effort to direct the Board's intentions, senior IASB staff noted that both Boards should identify the problem trying to be solved. In particular, offsetting arrangements are proving a particular concern for financial instruments in large multi-national banks, where similar institutions often report very different financial statements.
The IASB Chairman suggested that financial instruments and commodities should be the focus. Other Board members agreed, but suggested that a final check for 'weird and funky non-financial items' that should be in the scope should be conducted later in the project.
The staff asked Board members to raise their top issues with them, so that the project plan could be as well-structured as possible, meaning that a minimum of Board time could be used up. Responding to this invitation, the following issues were suggested for consideration:
There seemed to be a preference that this project be narrow in scope-focused on offsetting for financial instruments and commodities, rather than the right of off-set generally.
The IASB has still to complete its due process associated with adding a topic to its Agenda. It is likely that this issue will be discussed with the IFRS Advisory Council at its meeting 21-22 June.
The Boards discussed the draft application guidance for measuring risk adjustment, to be included in the forthcoming exposure draft on insurance contracts.
The Boards discussed the draft application guidance for measuring risk adjustment, to be included in the forthcoming exposure draft on insurance contracts. In their 18 May 2010 joint meeting, the Boards decided that, if the measurement model for insurance contracts were to include a separate risk adjustment, the range of available techniques for measuring that risk adjustment should be limited.
The Board reconsidered the articulation of the objective and characteristics of the risk adjustment. After a significant discussion the Board agreed to modify the objective of the risk adjustment to 'the maximum amount the insurer would rationally pay to be relieved of the risk that the ultimate fulfilment cash flows may exceed those expected'.
The Boards considered whether the risk margin might be negative. The staff noted that it might be theoretically possible to have a negative margin, but such occurrences should be rare.
Some Board members expressed their preference for an exit price notion for measurement of insurance contracts. Some of these Board members noted that the new objective came close to the exit price notion without calling it that name. Other Board members disagreed and noted that the difference to the exit price (fair value) would remain in the absence of service margin and own credit risk. The majority of the Boards rejected the exit price notion as in their opinion there is not enough transactions on the marketplace to calibrate the exit price. As such entity-specific perspective inputs into measurement cannot be avoided.
The FASB chairman expressed his view that the high level guidance on the risk adjustment techniques supplemented with disclosures should be the middle ground between the various alternatives.
The majority of Board members agreed to emphasise the one-sided nature of the risk (exceed the expected cash flows rather than differ from the expected cash flows). For those members, the risk margin is compensation for the uncertainty and reflects risk aversion (as a pricing mechanism) of the reporting entity. Some Board members also noted that the risk aversion is a broader concept than one-sided risk.
Finally, the Boards considered whether to include more discipline in the objective of the risk adjustment. Nonetheless, most of the Board members were concerned that any tightening would lead to additional complexity and introduction of new concepts that would lead to additional rules. As such the Boards confirmed the objective of risk adjustment as 'the maximum amount the insurer would rationally pay to be relieved of the risk that the ultimate fulfilment cash flows may exceed those expected'.
The Boards also continued their discussion (from their 10 June 2010 meeting) on which methods should be permitted to measure risk adjustment. After a discussion, in which several Board members expressed their concerns about application of the confidence level method and its limitations (applicable only to normal distributions whereas distribution of losses for insurance contracts is usually skewed, ignoring the tail risk) as well as limitations of the other methods (for instance, the assumption of the $ for $ liability compensation for relieving from potential risk under the conditional tail expectation approach) the Boards agreed to provide description of three methods as part of the proposed application guidance: confidence level, conditional tail expectation and cost of capital.
Although some Board members suggested limitation of use of any of the methods, the Boards decided not to prescribe any method as they believed that each technique covers a specific part of risk distribution and its use depends on particular circumstances.
One Board member noted that these methods should include both quantity and price of the risk and noted that the methods as proposed encompass only the quantity element. Nonetheless, the Boards did not agree to prescribe any method that includes price of risk due to its complexity and the fact that it would lead to exit price measurement.
As such the Boards approved the proposed draft application guidance on risk adjustments, containing characteristics of techniques that can be used as well as description of three techniques that might be used - confidence level, conditional tail expectation and cost of capital and their comparison. The Boards agreed not to include any additional methods in the draft application guidance.
The Boards considered several follow-up issues related to reinsurance that were raised at the 10 February 2010 meeting.
The Boards also agreed that at inception of the reinsurance contracts the reporting entity should re-measure the underlying reinsurance asset, as the risk profile might have changed from the last reporting date. The Boards agreed that a cedant shall not recognise any negative residual or composite margins when measuring a reinsurance asset, but instead if the consideration paid by the cedant for the reinsurance contract is less than the measurement of the reinsurance asset the cedant shall recognise that difference as a gain in profit or loss at inception of the reinsurance contract.
The IASB agreed that a cedant should recognise any ceding commissions arising from reinsurance contracts as reduction in the premium paid to the reinsurer.
The FASB agreed that these commissions should be recognised as a gain in profit or loss, to the extent that these ceding commissions refer to the reinsurer's share of the cedant's incremental acquisition costs. The cedant shall recognise that gain at the earlier of the day on which it recognised the reinsurance contract and the day on which it incurred the incremental acquisition costs. The cedant shall treat the remaining share of ceding commissions as a reduction of the premium ceded to the reinsurer.
Even though the FASB members agreed with the proposal on ceding commissions they noted that that tentative decision might change as a result of reconsidering the treatment of acquisition costs.
One IASB member asked about the presentation of these commissions. The staff clarified that according to the expanded margin presentation model (that was tentatively agreed) these commissions would be presented as revenue in the same amount as the acquisition costs incurred. Several IASB members expressed their concerns about such accounting outcome. As a result the Boards will re-address the issue at a later stage.
The staff presented a paper summarising the package of tentative decisions made in the Insurance project. As the FASB indicated that it will be reconsidering the treatment of the acquisition costs what could have a significant impact on further parts of the project, the Boards decided not to continue their debate. The Boards observed that the objective of the insurance contracts seem to evolve over time from the fulfilment value approach to the contract activity approach that include all the direct and incremental cash flows. Both Boards seem to agree with such characterisation. As such the Boards observed they might want to revisit some decisions to see whether they are consistent with the changed objective.
The Board also observed that they will need to revisit several aspects of the proposed model - treatment of acquisition costs, unbundling, contracts with participating features and presentation of the performance statement (mainly the expanded margin approach).
The Boards turned to discuss a summary of issues for which the two Boards had come to different conclusions, with the view that they attempt to come to a common view, so as to limit the number of divergent positions in the forthcoming ED to as few as possible.
Acquisition costs
The IASB proved that it remains split among itself, and even with the staff characterisation of their previous decisions, in particular whether it would be more appropriate to describe the 'expense as incurred' approach as 'contract cash flows'.
Other Board members disagreed. The staff tried their best to clarify what the agenda paper was attempting to achieve, but with only limited success.
After a vigorous debate, the IASB voted 8-7 in favour of retaining the approach that expenses acquisition costs at inception, but recognises a revenue offset to the extent of the incremental acquisition costs.
The FASB confirmed their position, that acquisition costs are excluded from the initial margin.
Margin: risk adjustment
The IASB confirmed their preference to include a risk adjustment plus a residual margin in the initial measurement of the insurance contract (9 in favour). The FASB confirmed that they still favoured using a composite margin, which they see as more relevant for the fulfilment approach adopted.
Margin: should interest be accreted on the residual/composite margin?
Another interesting debate occurred. However, after it became evident that two senior IASB staff members disagreed on this issue, the IASB agreed not to conclude on this matter and the staff will return with a coordinated recommendation. The FASB confirmed that they preferred not to accrete interest on the composite margin (3 in favour).
Participating contracts
The IASB confirmed (2 opposed) that they would include participating payments in the same way as any other contractual cash flow within the expected present value. The FASB confirmed that they would include participating payments to the extent that the insurer has an obligation to pay.
Definition: when does insurance risk exist?
The IASB agreed (10 in favour) to conform to the FASB's tentative decision (and thus amending the current IFRS 4 definition with a new test): insurance risk would exist if there is at least one scenario in which the present value of net cash flows could exceed the present value of premiums.
Embedded derivatives
The IASB agreed (14 in favour) to conform to the FASB's tentative decision that the unbundling principle in the Insurance Contracts standard should be followed for derivatives embedded in an insurance contract - i.e., that such items should be unbundled unless the components are so interdependent that they cannot be measured separately. The staff believed that this would lead to the same outcome as using the principle expressed in IAS 30 AG33(h).
Derecognition
The IASB and FASB conformed their decisions (no votes): the derecognition principle in IAS 39 should be used-i.e., derecognise a liability when extinguished (i.e., when the obligation is discharged, cancelled or expires)-but with an explanatory comment that when an insurance contract is extinguished, the insurer is no longer at risk and no longer required to transfer any economic resources for that obligation.
Portfolio transfers
The FASB agreed (3 in favour) to align to the IASB's tentative decision, that a loss should be recognised on a portfolio transfer if the present values of the cash flows (including any risk adjustment) exceeds the consideration received.
The IASB chairman asked whether any of the IASB intended to present an Alternative View in the exposure draft. Mrs McConnell and Messrs Engstrom, Leisenring and Smith indicated that they would do so (Mr Leisenring's dissent would have effect only if the ED is balloted before 30 June 2010, which seems unlikely).
Mr Herz noted that the FASB still had several issues to resolve before they were in a position to know what form their due process document would take. They would be discussing these issues in the week of 20 June 2010.
All other insurance issues scheduled for this meeting were cancelled.
The Boards discussed possible transition requirements for lessors under the derecognition approach to lessor accounting.
The Boards discussed possible transition requirements for lessors under the derecognition approach to lessor accounting. The staff noted that the following possible approaches had been rejected as candidates because the boards have previously rejected them when considering transitional provisions for lessee and lessors:
The staff were unable to decide which of the following should be recommended to the Boards, so both were presented as possible approaches:
The staff stressed that the only real difference was how the entity should measure the residual asset.
A FASB member proposed and other IASB and FASB members refined a third possibility, which would simplify the accounting on transition to a more 'rough and ready' approach based on the remaining useful life of the leased asset. The Board members who supported this approach criticised the 'horrendous' transition provisions proposed by the staff, which was seen as unduly harsh on entities that had not unreasonable accounting now-the asset and related financing liability were in the financial statements.
After a protracted debate, there was not sufficient support for the 'rough and ready' approach and in a subsequent vote, both Boards agreed to adopt Option B, above (IASB: 9 in favour; FASB: 4 in favour).
The Boards discussed lessor accounting for a lease with service components under a derecognition approach. The staff explained that if the lessor is unable to identify service components in an arrangement, a concern exists that under the derecognition approach there would be an overstatement of revenue at lease commencement. This is because the lessor would recognise revenue for services before those services have been provided.
The staff considered four possible approaches that could be adopted for the lessor to separate payments between lease and service components when the services are not distinct:
A vigorous and heated debate followed. An IASB member used the example of an office building lease for which the lease payments included heat, light, water, etc. The board member wanted to know whether the obligation to provide these services would be recognised as a liability. (This IASB member would characterise the final bullet above as 'recognising a liability for the obligation to provide future services'.)
Board members disagreed about whether the Leases standard or Revenue Recognition standard would capture the obligation to provide future services - some saw the 'bucket' in revenue recognition as quite large; others thought the 'bucket' in leases would be the large one.
A call for 'first preference' votes was called: the approach requiring an estimate of future service costs for the allocation of the consideration between service and lease elements had the support of a majority of the IASB (9 in favour) but not the FASB (3 opposed).
The chairman closed the debate, promising to revisit the issue, if necessary, after the Boards' discussions of the Performance Obligation Model vs. Partial Derecognition approach on 17 June.
The FASB staff presented a brief overview of the FASB's exposure draft, Accounting for Financial Instruments, highlighting some of the key areas of the exposure draft.
The IASB members were interested to know how the outcome from applying these requirements would differ from the outcome in accordance with IFRS 9.
Where possible, the FASB staff explained how the requirements would apply to practical situations, but also admitted that some areas still need to be developed further. In particular, the IASB was surprised (if not concerned) about the additional criteria to qualify for equity accounting for investments in associates, proposed by the FASB.
The session was informative and no decisions were made.
The IASB Chairman noted that three 'founder' Board members retired at the end of June and that this was the last time all of them would be in London. He paid individual tributes to the services to standard-setting over many years (both at the IASB and elsewhere) of Gilbert Gelard, Robert P Garnett and James J Leisenring. Bob Garnett remains in London on the staff of the IASB as Chairman of the IFRS Interpretations Committee.
This summary is based on notes taken by observers at the joint IASB-FASB meeting and should not be regarded as an official or final summary.
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The IASB publishes summaries of the deliberations at Board meetings in its newsletter IASB Update. Past issues of IASB Update are available on IASB's Website. On Individual Project Pages on the IASB Website you will find links to observer notes and excerpts from IASB Update relating to that project. |
The IASB members who had indicated an intention to present an Alternative View in the forthcoming Insurance Contracts Exposure Draft outlined the likely reasons for their dissents.
The IASB members who had indicated an intention to present an Alternative View in the forthcoming Insurance Contracts Exposure Draft outlined the likely reasons for their dissents.
John T Smith
Mr Smith would dissent for many of the reasons he dissented to the issue of IFRS 4 Insurance Contracts. In addition, he objects to the treatment of the risk adjustment, the treatment of renewal options, and the accounting for investment contracts with a discretionary participation feature issued by an insurance company. He summarised his reasons by saying that he does not think the package of decisions in the ED advanced financial reporting. He thought that IFRS users knew that IFRS 4 was imperfect; he did not want to convey the message that the ED was a better answer.
Jan Engstrom
Mr Engstrom noted that he was still assessing whether he would dissent.
He is concerned that the scope was too broad. He agreed that health, life and catastrophe (high severity, low risk) contracts should have 'insurance accounting'. However, he saw many general insurance contracts (fire, auto, etc) as being no different in substance to service contracts and to force them into the proposed insurance accounting model would not help the insurance companies or their investors.
He disagrees with the treatment of acquisition costs. He noted that other types of business incur substantial costs when securing a contract (he used a defence supply contract as an example). Payments to agents and other experts were expensed in the period incurred; he did not see these 'contract acquisition costs' as any different in substance to insurance contract acquisition costs and asked why they should get different accounting.
Finally, he is not convinced that he understands (and therefore can accept) the overall model to be proposed in the ED.
Patricia McConnell
Mrs McConnell had not yet confirmed her intention to dissent.
However, she was particularly concerned about the treatment of acquisition costs and issues of display and disclosure.
James Leisenring
Mr Leisenring noted that his dissent was moot, since the ED would not be balloted until after his term as a Board member expired. However, he would have dissented for a number of reasons.
Fundamentally, he believes that the approach to insurance accounting to be proposed in the ED is inconsistent with the IASB Framework in that it recognises things as assets and liabilities that demonstratively do not meet the definitions of assets and liabilities in the Framework.
He does not believe that the scope is operational, especially with respect to health care and investment contracts. He does not see the logic for not recording the cash surrender value of an insurance policy as a liability when it is, in substance, the same as the demand deposit floor, which is recorded as a liability.
He would also object to a number of the display issues highlighted by other Board members.
The Board discussed lessor accounting: transition under a derecognition approach and accounting for purchase options.
In May 2010, the IASB expressed an interest in using a hybrid lessor accounting model. Under a hybrid model, a lessor would use a performance obligation approach to lessor accounting in some situations and a partial derecognition approach in others. The FASB have tentatively decided to adopt a performance obligation approach for all leases. The Boards debated whether the hybrid approach should be adopted for lessors' accounting.
Two possible variants of the hybrid approach were discussed (known as 'D' and 'F'):
Both approaches had their supporters, and the debate was heated at times. Those supporting the performance obligation approach usually would not accept the partial derecognition approach at all. However, some Board members did not think that either approach advanced lessor accounting significantly.
One Board member thought the approaches were looking at the wrong issue: to him the key issue was accounting for the underlying asset; the right to use that asset was a separate item to be accounted for under revenue recognition. However, this view did not receive support.
Ultimately, the session chairman determined that Approach D (performance obligation) had majority support among both Boards. However, the Boards then seemed to second-guess themselves as they were concerned that Approach D would challenge their decisions on leases with inseparable service elements on the previous day. A discussion ensued in which it became apparent that the IASB actually preferred a different lessor model in some cases - for example in leases involving real estate (both investment property and other real estate leases). This approach would bifurcate the lease payments: the lease element would be accounted for using the leasing standard; the service element using revenue recognition.
The Boards ended in two different places on this issue: the FASB were firmly (4 in favour) in the performance obligation (Approach D) approach. The IASB was firmly (11 in favour) in the bifurcation approach.
The session chairman asked the staff to develop realistic examples of both approaches to lessor accounting using a lease that included inseparable service elements. Those examples would be discussed in July.
One IASB member noted that he would not sign a ballot on the revenue recognition ballot draft while the lease accounting issue remain unresolved. This would mean that he would be unable to sign the ballot as the lease issue would not be resolved until after his term as a Board member expired.
The staff invited the Boards to reconsider their tentative decisions on accounting for purchase options. They proposed that the Boards adopt one of two fundamental approaches - as the staff was split, they were unable to make a definitive recommendation. Approach A would account for purchase options consistently with the accounting for options to extend or terminate a lease; Approach B would account for purchase options only upon exercise.
Some Board members who supported Approach B wanted bifurcate the option from the lease and account for the renewal option as any other kind of option. Purchase options were seen as fundamentally different from renewal options - a renewal option provided an additional period of a right to use; a purchase option gave access to the underlying asset. These are different in substance and deserved different accounting.
After another vigorous debate, a majority of both Boards (IASB: 10 in favour; FASB: 3 in favour) voted for Approach B. In follow-up votes, both Boards agreed that the option should not be bifurcated (that is, a 'do nothing with it' approach).
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